Small Businesses Worry About Adjusting for Overtime Rules

Image

Lior Rachmany, left, owner of Dumbo Moving & Storage, and some employees, working in Manhattan. Mr. Rachmany said he would probably hire more entry-level employees and minimize overtime pay for his salaried employees.CreditCreditYana Paskova for The New York Times

By Sarah Max

May 18, 2016

With a broad new class of workers becoming eligible for overtime, many small businesses are scrambling to figure out how to factor the regulations into their bottom line.

The Obama administration on Wednesday announced the final details of new labor rules to increase the salary cutoff for overtime pay. Although the plan was outlined a year ago and employers have several months to comply, many say the change will be a challenge to small businesses that pride themselves on a scrappy, entrepreneurial culture.

“We are pretty flexible,” said Kelli Glasser, who is president and chief executive of Exhibit Concepts, a 100-employee company in Dayton, Ohio, that designs, builds and manages exhibits for museums and trade shows. “ If somebody needs to pick up a sick kid or go to a doctor’s appointment, we let them do it because we know that at some point they’ll make up for it. Once you start tracking hours, that all changes.”

Currently, salaried employees who earn more than $23,660 a year and meet other criteria are not entitled by law to overtime pay, which is 1.5 times an equivalent hourly wage after an employee works more than 40 hours a week.

The threshold is scheduled to roughly double, to $47,476, on Dec. 1. That means millions of workers who were salaried will have to have their hours tracked to see if they qualify for overtime pay.

Employers will have various options. They could change the pay structure for employees making less than the new threshold to an hourly rate. They could raise the pay above the threshold so they won’t need to worry about overtime. They could even cut the base salaries of those who regularly work more than 40 hours, in expectation that overtime pay will make up the difference.

Among the business owners unsure of what adjustments to make is Lior Rachmany, the chief executive and founder of Dumbo Moving & Storage in New York. After hearing about the new threshold, he started examining how it would affect his 185 employees, 50 percent of whom are paid a salary.

Mr. Rachmany said he was reluctant to move so many additional workers to an hourly scale. “I think you get a better product when people are paid a salary,” he said. “When a person knows there is a task to get done, it will get done, not on the clock.”

Mr. Rachmany said he would probably end up hiring more entry-level employees and minimizing overtime pay for his affected salaried employees. He is also considering hiring freelancers and independent contractors. By doing so, he could increase operations in busy times and not have overtime be a yearlong worry.

The Fair Labor Standards Act of 1938 established the rules governing which employees qualified for overtime pay. For salaried employees to be classified as exempt from overtime, they must meet certain criteria.

For example, their roles typically need to be administrative, executive, professional or managerial. Currently, to be excluded from overtime, they also must earn at least $23,660 a year, or $455 a week, a figure that was last adjusted in 2004. Before that, the rate had been $250 a week since 1975. Had that amount been adjusted for inflation, it would be more than $52,000 in today’s dollars, according to the Economic Policy Institute.

The Labor Department calculated that 4.2 million workers would be affected by the higher overtime level, but the Economic Policy Institute estimated that the higher pay threshold would give 12.5 million more employees, or 23 percent of salaried workers, a new or stronger right to overtime pay.

Image

Valeri Bolkvadze is one of Dumbo Moving & Storage’s 185 employees, 50 percent of whom are on salary.CreditYana Paskova for The New York Times

Although businesses have had a lot of practice over the years adjusting for minimum wage increases for hourly employees in cities and states around the country, this rule change will be a significant shift for many small businesses and entrepreneurs, advisers say.

And unlike changes to the federal minimum wage, changes to the overtime threshold do not require an act of Congress, said Dan Bosch, a regulatory expert with the National Federation of Independent Business, a prominent small-business trade group based in Washington.

As of last month, many companies weren’t even aware that the changes were imminent.

“Across the board, nobody seems to know about this,” Adam Ochstein, the founder and chief executive of StratEx, a Chicago firm that provides human resources consulting and software to small and midsize businesses, said in an interview in April.

The short period of time before the new rules take effect is worrisome to some business owners.

“I’m not opposed to the change, but what I’m worried about is that it is such a huge increase, more than double, and it’s sudden,” said Ms. Glasser of Exhibit Concepts. “When we talk about minimum wage increases, those are being phased in most places. For this, there is no phase-in period.”

In addition, the new threshold is expected to be the same across the country, with no adjustments for local conditions.

“One amount is being applied nationwide, and it is not necessarily applicable in all markets,” Ms. Glasser said. In Dayton, Ohio, the median household income was $46,697 in 2014, the latest figure available from the United States Census Bureau. In San Francisco, the median was $83,222.

Another drawback, she said, was the precedent it would set for unmerited raises. And there is also the risk of a trickle-up effect: Employees not affected by the change might expect to see an increase in pay as well.

Even the employees who would benefit may be unhappy with the rule change. “A lot of salaried employees aren’t going to want to track their hours, even if it’s to their benefit,” said John Swanciger, chief executive of Manta, an online community of more than three million small-business owners. Manta recently surveyed its members about the pending regulations and found that more than half were unaware of the coming changes.

Opting out of the rule is not a choice for companies with any employees who make less than the threshold, said John P. Quirke, a lawyer and partner with McCarter & English in East Brunswick, N.J.

The practice of comp time — giving employees who work extra time a day off down the road — will also change. With the new rules, for employees in the private sector making less than $47,476 a year, comp time will not be an option.

“Public entities can offer comp time, but it’s illegal for private employers to do so,” Mr. Quirke said. Employers can define what constitutes a workweek, but any work beyond 40 hours in that week will be considered overtime.

Small organizations should start by determining which employees could be affected. “I think the biggest issue will be with employees routinely working 45 or 50 hours a week and happily making $40,000 to $45,000 a year,” he said. “Companies will need to figure out what to do with them: Reduce their hours or bump their pay?”

For companies with employees who earn less than the threshold but have predictable hours, the easiest strategy may be to do nothing at all. That is, reclassify them as nonexempt and limit their overtime hours.

“They will still need to track their hours, even if they’re salaried,” said Mr. Ochstein of StratEx, who added that such employers would need to keep close tabs on hours worked to ensure that overtime costs were under control. “Don’t have people working 60 or 70 hours a week,” he said. “If they are, increase their salary enough so they are exempt or hire more people for those roles.”

A version of this article appears in print on , on Page B4 of the New York edition with the headline: New Overtime Rules Challenge Culture, Many Small Businesses Say. Order Reprints | Today’s Paper | Subscribe